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Shell-Shocked Retailers Seek Stimulus

Can anything lure shoppers back to the stores? Retailers, pondering the miserable sales results for December and the holiday season that were reported on Jan. 14, are pushing the idea that sales-tax holidays incorporated into the developing economic stimulus package could provide a boost to their troubled industry.

Help is needed. The Commerce Dept. reported that December retail sales dropped 2.7%, more than double the 1.2% decline that Wall Street expected. It was the sixth straight month of sales declines, and sales fell across virtually all sectors, with the exception of health and personal care stores. At the same time, the National Retail Federation (NRF) reported that 2008 holiday sales—combining November and December—dropped 2.8%, to $447.5 billion. Consumer spending accounts for about two-thirds of U.S. economic activity.

"The current economic crisis proved to be more challenging than any had anticipated," NRF Chief Economist Rosalind Wells said in a press release. "Consumers showed they were more than willing to wait out retailers this year, causing increased pressure on prices."

More Bankruptcies

The weak shopping season is continuing to take its toll on retailers. On Jan. 14, California-based department store chain Gottschalks (GOTT) filed for Chapter 11 bankruptcy and put itself up for sale. One day earlier, discount clothing chain Goody's Family Clothing filed for Chapter 11 bankruptcy protection, for the second time in less than a year. The bankruptcies follow widespread cutbacks by retailers, including Macy's (M), which said earlier this month it would close 11 stores in nine states.

The latest numbers are evidence that a term like "recession-proof" for even essential sectors isn't always applicable. Over the past year, it seems as if every industry has witnessed some slowdown. For instance, in early 2008, when restaurants started hurting, people said the grocery stores would be the beneficiaries, but within a few months premium food marketer Whole Foods (WFMI) was feeling the pain, and by midsummer shoppers were leaving even the mid-tier supermarkets like Safeway (SWY) and Supervalu (SVU) and going to the super discounters like Wal-Mart (WMT) and Costco (COST).

Likewise, industries like toys and pet supplies were considered recession-proof, but in December KB Toys went bankrupt and Toys 'R' Us saw same-store sales for the holiday season decrease by 3.4% in the U.S. and 5.1% internationally. Meanwhile, the CEO of chain retailer PetSmart (PETM), Philip Francis, says his business has been affected as customers have deferred making bigger purchases for their pets, though pet food sales have held up reasonably well.

Retailers say they have a possible solution in the sales-tax holidays applying to most goods, including clothing, home furnishings, restaurant meals, and cars. Under the NRF plan, there would be three tax holidays during the year, in March, July, and October, each lasting 10 days including two weekends. The federal government would reimburse states for lost revenue estimated at $20 billion. The five states that don't have a sales tax would also get some money. The sales-tax savings would amount to about $175 per family, the retail federation estimates.

Stimulus That Works?

"I don't think there's one silver bullet that will improve the consumer spending and improve the situation we are in," said Stephen Sadove, chairman and CEO of Saks (SKS). "But I believe the tax holiday is a direct benefit to the consumer, and there is a lot of history that shows where cities and states have done tax holidays, it has led to incremental direct consumption, which will stimulate the economy."

Anthony Randazzo, a research associate at the Reason Foundation, a libertarian nonprofit policy group, writes on the group's blog that the tax holiday plan "just recycles tax dollars." He notes: "Under the NRF plan, the federal government would tax citizens, then give that money to the states, so that the states could in turn give tax breaks to the citizens. Along the way money gets shifted around, and citizens don't really 'save' $175 per family. If this was the best way to go, why not just limit federal payroll taxes?"

A sales-tax holiday is just one more suggestion that President-elect Barack Obama's economic team is going to have to grapple with as they shape a $775 billion stimulus package that will provide the most bang for the buck. With the latest appalling retail numbers, the tax holiday approach may get a little more sympathy.

McConnon is a staff editor for BusinessWeek in New York.
Mintz is news editor for BusinessWeek.com in New York.